What’s Base Erosion and Profit Shifting?
The idea is simple. Firms make profits in one jurisdiction, and shift them across borders by exploiting gaps and mismatches in tax rules, to take advantage of lower tax rates and, thus, not paying taxes to in the country where the profit is made.
There have been concerns across the globe about companies making profits in a particular country but not paying taxes to the local government. The Organization for Economic Cooperation and Development (OECD) states that BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises. It also states that estimates since 2013 conservatively indicate annual losses of anywhere from 4 to10 per cent of global corporate income tax revenues, or $100-$240 billion annually.
The OECD, under the authority of the Group of 20 countries, has considered ways to revise tax treaties, tighten rules, and to share more government tax information under the BEPS project, and has issued action plans last year. One of the areas discussed was on addressing tax challenges in the digital economy.
The term sprang into the public consciousness last month, because the 2016 Union Budget announced an ‘equalisation levy’ of 6 per cent on payments exceeding over Rs 1 lakh to online ad services from non-resident entities. Prominent among the companies affected would be new economy multinationals with Indian subsidiaries, like Facebook and Google.
India is the first country to impose such a levy, post the OECD action plan. A tax panel has recommended expanding the ambit of this levy to cover a wide gamut of transactions including online marketing, cloud computing, website designing, hosting and maintenance, platforms for sale of goods and services, and online use of or download of software and applications.
